TDS: DTAA- Business expenditure- Disallowance u/s. 40(a)(i)- A. Y. 2001-02- Assessee paid administrative fee to its US-AE- Assessing Officer disallowed same for not deducting TDS- As condition of TDS-deduction was only applicable on payment to non-resident and not applicable on payment to resident for relevant period, it created discrimination- consequently, assessee would get benefit of DTAA and, therefore, action of Assessing Officer was not justified-

Assessee paid administrative fee to its US-AE for availing various services like data processing services, accounting, financial and planning services etc. In the A. Y. 2001-02, the Assessing Officer disallowed said payment on ground that said payment was fee for technical service warranting deduction of TDS which assessee did not deduct. The Tribunal allowed the assessee’s claim. On appeal by the Revenue, the Delhi High Court upheld the decision of the Tribunal and held as under:

“i) A rticle 26(3) of India-USA DTAA states that for the purpose of determining the taxable profits of a resident of a contracting state (India), the payment of interest, royalty and other disbursements paid to resident of other contracting state (USA) shall be deductible under the same conditions that apply to such payment being made to a resident of India. The expression other disbursements occurring in said article 26(3) is wide enough to encompass the administrative fee paid by the assessee to its US-AE.

ii) Section 40(a)(i), as it was during the assessment year in question i.e. 2001-02, did not provide for deduction of TDS where the payment was made in India. The requirement of deduction of TDS on payments made in India to residents was inserted, for the first time by way of clause (ia) to section 40(a) with effect from 1st April 2005.
 
iii) A s far as payment to a non-resident is concerned, section 40(a)(i) as it stood at the relevant time mandated that if no TDS is deducted at the time of making such payment, it will not be allowed as deduction while computing the taxable profits of the payer. No such consequence was envisaged in terms of section 40 (a)(i) as it stood as far as payment to a resident was concerned. This, therefore, attracts the non-discrimination rule under article 26(3). The object of article 26(3) was to ensure non-discrimination in the condition of deductibility of the payment in the hands of the payer where the payee is either a resident or a non-resident. That object would get defeated as a result of the discrimination brought about qua nonresident by requiring the TDS to be deducted while making payment of FTS.

iv) As per section 90(2), the provisions of the DTAA would prevail over the Act unless the Act is more beneficial to the assessee. Therefore, except to the extent a provision of the Act is more beneficial to the Assessee, the DTAA will override the Act. This is irrespective of whether the Act contains a provision that corresponds to the treaty provision.

v) In view of above, it is held that section 40(a)(i) is discriminatory and, therefore, not applicable in terms of article 26(3) of the Indo-US DTAA . Consequently, the administrative fee paid by the assessee to its AE is allowed.”